Pricing Strategies PDF

Preview

Summary

COVERS ALL THE TOPICS BELOW:

Theories influencing Pricing Strategies
o Positioning of the product/ service
o Perception around the product/ service Penetration Pricing Price Skimming Monopoly Pricing Every-day low pricing strategy Pricing of Services On-line pricing Sectoral...

Description

MODULE 6

Theories influencing Pricing Strategies Understanding Pricing Strategy Pricing strategy revolves around three main points: cost and profit objectives, consumer demand and competition. To set a price, first add all your costs together and subtract any other sources of revenue: this is the minimum profit you need to break even, so this number defines your minimum price. Consider your customers and the demand for your product to determine your maximum selling price. Now that you have a price range, use profit objectives and information about your competition to choose the best price. Pricing Theory Pricing is either cost-based, demand-based or competition-based. In cost-based pricing, you set prices based purely on production costs and the desired profit without considering the demand. In demand-based pricing, consumer research helps to ascertain the acceptable price range, then you can determine profit and cost requirements within that range. In competition-based pricing, you set your prices based on your competitors. Depending on customer loyalty, or brand differences, you might be selling at, above or below market price. Main Strategies Use premium pricing when you have a serious advantage over the competition: you can charge a high price for uniqueness. When you’re new to a market and need to gain customer loyalty, try penetration pricing: set your prices extra-low to gain market share and then raise them later. When you start out with a competitive advantage, but know it won’t last, try skimming. The opposite of penetration pricing, skimming allows you to make more profit in the beginning and then lower prices to remain competitive later. Economy pricing is straight low price: keep your costs low to keep the prices low and still turn a profit. Psychological Pricing Psychological pricing means setting the price so that customers have a positive emotional reaction. For instance, United States gasoline prices are always listed to a hundredth of a dollar. If the price is $3.139/gallon, consumers read this as $3.13, but marketers actually charge $3.14 since we round up to the nearest penny. It’s all about perspective, and customers often see odd price values as more attractive or lower than they really are. Product Oriented Pricing Certain product relationships allow you to change your pricing strategy. Adding optional extras, such as airline charges for extra baggage, or selling products in a bundle, hides the true cost from your consumer. When your product has a partner, such as a razor and blades, you can price the initial purchase (razor) low and recoup the costs with the secondary purchase (unique blades). Finally, consider promotional pricing such as buy-one-get-one-free to draw customers to your product with the hope that they will continue buying after the promotion ends.

roduct positioning is an important element of a marketing plan. Product positioning is the process marketers use to determine how to best communicate their products' attributes to their target customers based on customer needs, competitive pressures, available communication channels and carefully crafted key messages. Effective product positioning ensures that marketing messages resonate with target consumers and compel them to take action. Customer Needs Effective product positioning requires a clear understanding of customer needs so that the right communication channels are selected and key messages will resonate with customers. Product positioning starts with identifying specific, niche market segments to target -- not just women over 25 but women from 25 to 30 who work in senior-level management positions, make $X per year, are single and enjoy sporting activities. The more specific, the better. In addition to identifying the customer based on demographic and psychographic (personality/lifestyle) attributes, marketers need to understand customer needs, especially relative to the products and services they have to offer, to clearly convey value as part of their marketing plan. Competitive Pressures Marketers must weigh competitive pressures when they are considering the positioning elements of their marketing plans. Effective positioning conveys to consumers why this company's product or service should be preferred over other competitive options based on what the company knows about the target audience's needs. Effective marketing plans clearly identify how the company's products or services are different from competitors' offerings and in what ways. There is no value in being a "me too" product offering and simply copying what competitors are doing. Marketers must stand out from the crowd in ways that hold value for their target markets. Communication Channels Product positioning helps marketers consider how their offerings are different from others that consumers have to choose from. But it is not enough to know this from an internal perspective -marketers must communicate this to the target audiences. To do this effectively, they must choose communication channels that are designed to connect with their identified target audiences at times when they will be most receptive to these messages. Consider how automobile manufacturers position their products through communication via television commercials during sporting events, for instance, or how cosmetics manufacturers run full-page, full-color ads in women's magazines. Carefully Crafted Key Messages The final challenge in effective product positioning is conveying the differentiating, value-added aspects of your product or service to your target audience through the communication channels you have selected. These messages are designed to convey how your product is different (and better) than competitive offerings, as well as to address the value-added attributes that are important to your audience. Product positioning is at the foundation of any effective marketing plan because it impacts the ultimate purchase decision. 10 ways product positioning 1. Know Your Target Audience

Never give your target audience what they need. Give them what they want. People don’t buy what they need. They buy what they want. It’s the marketer’s job to discover everything they possibly can about the target audience. Understanding demographics, lifestyle, and spending habits can make the difference between reaching and distancing the target audience. If you can make your product positioning feel natural and unobtrusive, it can add a massive amount of value to your marketing. 2. Tell Them Who You Are Establish brand credibility and you can establish a long-term relationship with target audiences. People that trust a brand are much more inclined to purchase from that brand. Don’t make promises or claims that can’t be verified or aren’t true. Honesty and transparency are the best policies and will promote healthier product positioning. 3. Provide Evidence You can’t build brand credibility until you prove that your brand is reliable and trustworthy. The best way to establish credibility is by presenting evidence. Customer reviews, testimonials, case studies, sales numbers, and statistics are just a few methods that can be used to great effect. Reviews are especially powerful. When was the last time you made a significant purchase without reading reviews on Amazon.com, Ebay, or Quora? 61% of customers read reviews online before making a purchasing decision. 4. Value Proposition Your value proposition needs to answer a crucial question; How can your product improve the lives of your customer? Your target audience will dismiss your product in a heartbeat if they don’t perceive any value. This is the most important aspect of product positioning and one of the hardest to execute effectively. Discover the most valuable aspects of your product and then look for ways to promise and deliver on that value. 5. Unique Selling Proposition How is your product unique? What distinct problem does it solve? In order to make this work for your product positioning, you need to pinpoint exactly what makes your products and brand unique. Then, convey those elements to your target audience. People love to have ownership in brands and products that are different and can stand out. 6. Segment Your Market You can’t appeal to everyone in your target market without customization. Separate your audience into groups with shared traits, habits, and needs. Once this is accomplished you’ll be able to speak to the individual wants of each group with more authority and influence. 7. Carefully Craft Your Message Each market segment has difference communication requirements. The medium, channel, voice, and tone of each segment should feel custom and personal. Start by creating a positioning statement for each of your segments:



Define your ideal target customer



Decide how your product will impact the target customer



Determine how you will fulfill product claims

Once you’ve determined these qualifiers you can begin crafting custom messages that speak to the values and interests of each segment. 8. Know Your Competition Knowing the details of your competition is the key to differentiation in product positioning. There are a few ways to differentiate your products and brand. 

Innovation. If your products are unique and memorable then you have an edge over the competition.



Improvement. Make a better mousetrap and market it better than the competition.



Core values. Stand out from the crowd with admirable core values and policies that can’t be replicated.

9. Showcase Your Expertise Demonstrate why your target audience should do business with you. What makes you the best? Why is your product a better choice than any other product in its category? Demonstrations, testing, and trials can be very effective product positioning tools. If you’ve won awards, been highly ranked, or professionally reviewed that’s the perfect opportunity to showcase the efficacy of your product. 10. Focus on Competitive Advantages At the end of the day, it boils down to building a competitive advantage. If you think about great pianos, Steinway comes to mind. Quality cars that hold their value usually invoke thoughts of Toyota or Honda. What you’re selling doesn’t matter as much as the way it’s being sold. Of course, you can’t expect to sell a product that doesn’t work and doesn’t deliver on claims without eventually going out of business. Ultimately it’s the way you build a competitive advantage that will set your product positioning apart.

Perception around the product/ service The products and services that an industrial company has to offer are generally organized around its customers’ needs in addition to the level of expertise and production capabilities of the firm. Creating a strategy for product development is an important and often multifaceted segment of running a successful enterprise, and it brings together a range of different principles, such as research and development, marketing, engineering, design, materials, and manufacturing. In most cases, an industrial product development strategy will depend on two main goals: keeping the new product or product line within the company’s overall objectives and marketing philosophy, and developing a system for assessing the performance of an

existing product. For evaluating the success of an existing product, factors such as sales, customer response, profits, competition, and market acceptance are usually involved. Product development is usually based upon these criteria, and putting together a strategy helps to determine which products need to be modified, continued, or discontinued. In addition, development analysis can set guidelines for new products to be introduced. When working on product development, it can be helpful to remember that an industrial product is often more than just a tangible good, but also a set of technical, economic, legal, and personal relations between the consumer and the seller. Elements such as price, product specifications, purchasing contracts, and a customer’s personal interpretation of a company’s brand and reputation are all significant influences on a product’s overall performance. Customer Perception Consumers can evaluate a product along several levels. Its basic characteristics are inherent to the generic version of the product and are defined as the fundamental advantages it can offer to a customer. Generic products can be made distinct by adding value through extra features, such as quality or performance enhancements. The final level of consumer perception involves augmented properties, which offer less tangible benefits, such as customer assistance, maintenance services, training, or appealing payment options. In terms of competition with other products and companies, consumers greatly value these added benefits when making a purchasing decision, making it important for manufacturers to understand the notion of a “total package” when marketing to their customers. For example, when manufacturing automotive parts, a high-performing product will provide the customer base with basic benefits, while adding spare parts, technical assistance, and skill training will offer enhanced properties to create a total package with increased appeal to consumers. Changing Product Strategies In industrial product development, a marketing strategy that is flexible and adaptive to changing market circumstances stands a greater chance of being effective in the long-term. Products and consumer perceptions are variable, so changes in strategy may be required to better address customer needs, technological developments, new laws and regulations, and the overall product life-cycle. By monitoring external conditions and shifting product development accordingly, a company can better target its consumers and learn to react to their needs. The major factors that can necessitate a change in product strategy include: • Customer Preferences: Fluctuations in the cost of materials, new application requirements, and changing brand awareness are just a few of things that can cause consumer needs to change. Keeping close track of customer response to a product and taking their demands into consideration are important for maintaining market share. • Technological Advances: A new technological development can engender a change in a product line, causing products to need modification in order to remain competitive or rendering some products obsolete. For example, fiber optic cables have replaced older cables in certain applications and many businesses have switched from main frame computers to personal computers. Being aware of these advances can help a business stay ahead of the curve. • Laws and Regulations: The implementation of new governmental regulations can cause certain products or manufacturing methods to be restricted, limiting their consumer appeal. Conversely, new laws can also lend an advantage to certain business and deregulation can

sometimes benefit production standards. Product development strategies must shift according to the legal landscape. • Product Life-Cycles: To preserve the rate of growth in profit and sales, many industrial companies decide to alter, discontinue, or replace older products with newer models or more recent upgrades. These changes are usually made periodically, allowing existing products that reach maturity or decline to be phased out or modified, thus retaining their appeal.

Penetration Pricing

Penetration pricing can bring new customers into your store, increasing market share and building customer loyalty. However, when implemented incorrectly, it may cause you to lose money and may increase competition rather than decrease it. To price products most effectively, consider your cost/profit objectives, customers, the product's life cycle and your competition. Penetration pricing is the practice of setting an initial price much lower than the eventual standard price. “A penetration strategy is the price war; this strategy goes for the deepest price cuts driving at every moment to have your price be the lowest on the market,” reports Joern Meissner, of Meissner Research Group, a Lecturer in Management Science at the Lancaster University Management School. Customers who are looking for the best bargain will switch their loyalty to you if you can entice them with the lowest prices. This strategy works best during a product's growth phase, since the product already has a positive reputation.

Take, for example, discount stores (e.g. Walmart), wholesalers (like, SaleHoo) and hook-andbait manufacturers (e.g. printers or razors). They use penetration pricing in a couple of ways. First, they use it to sell new products in their stores by advertising how low their prices are compared to other stores. They do this in hopes that the customers will purchase few items upon entering the store. Although they would be losing funds on the new product, they would be getting more customers into the store. Additionally, they use penetration pricing to undersell their established competition. Once they’ve secured and expanded their customer base, they gradually start raising prices. The explanation is that often the initial prices introduced via penetration pricing don’t give a great deal of profitability since the margins are generally very slim. As a result, the business needs to rise prices over time in order to be able to offer their products and services more profitably. When coming into a new market, the penetration pricing approach is crucial since it’s useful when determining whether the product can capture a secure market rate. Despite not making any change to the company’s marketing strategy, it has an unimaginable potential for both profit and revenue growth. However, it is important to understand all advantages and all disadvantages of penetration pricing as well as the risks that it carries. Advantages of Penetration Pricing  If penetration pricing is put into place, the adoption percentage, as well as diffusion, are elevated. Adoption is like diffusion, but it concentrates more on the emotional acknowledgment whereas diffusion depends on the acceptance from consumers of the recent product or service.  Consumers, having found great deals on your product or service before, will most likely come back again in order to catch those profitable deals again.  Initially, there is hardly any competition since the competitors are taken aback by the action and don’t have enough time to react and to implement price intelligence. If they do decide to enter, they risk having smaller profits. They would also be entering a new market share which is full of uncertainty.  Low prices encourage the word-of-mouth advertising for a product, therefore any promo activity becomes more efficient. Disadvantages of Penetration Pricing  Brand damage. Consumers often assume that the prices will stay as low as they are now. They are often taken aback by abrupt rises in prices and as a result, they may be prone to try switch to a competitor. Therefore there is a loss of market share that had been gained.  False loyalty. Penetration pricing may attract a particular type of customers who only keep their eyes out for profitable deals and nothing else.  Pricing wars. Competitors will try to hold their market share by setting low prices, too. It may cause price wars and profitability losses.

Price Skimming

Price skimming is a product pricing strategy by which a firm charges the highest initial price that customers will pay and lowers it over time. As the demand of the first customers is satisfied and competition enters the market, the firm lowers the price to attract another, more price-sensitive segment. The skimming strategy gets its name from skimming successive layers of cream, or customer segments, as prices are lowered over time. Price skimming is often used when a new type of product enters the market. The goal is to gather as much revenue as possible while consumer demand is high and competition has not entered the market. Once those goals are met, the original product creator can lower prices to attract more costconscious buyers while remaining compet...